The San Francisco Proposition E Gross Receipts Tax Ordinance: A Mixed Bag for Investment Fund Managers

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On November 6, 2012, San Francisco residents approved Proposition E (the “Gross Receipts Tax Ordinance”) instituting a new gross receipts tax to replace the City’s 1.5% payroll tax. The new gross receipts tax is phased in over a five-year period, beginning in 2014, as the current payroll tax is phased out. For managers and general partners of investment funds engaging in business in San Francisco, the enactment of the ordinance is a mixed bag. While there is some comfort that the ordinance exempts receipts of the underlying investment funds for purposes of the potential application of the tax to such funds, there is some unfavorable statutory language that would subject the manager’s management fee and will likely subject performance allocations to the tax.

General Rule -

Under the Gross Receipts Tax Ordinance, subject to certain exceptions, every person engaged in business within the City of San Francisco is required to pay an annual tax measured by such person’s gross receipts from all taxable business activities attributable to the City of San Francisco. The term gross receipts is defined broadly to include “all amounts received by a person from whatever source derived” including all amounts that constitute gross income for federal income tax purposes. Section 952.3(a). The Gross Receipts Tax Ordinance provides that the tax rates applicable to financial services activities range from 0.400% for gross receipts up to $1,000,000 to 0.560% for gross receipts above $25,000,000.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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